Selling a business is a massive milestone for entrepreneurs, in part because they’re suddenly forced to handle a host of new financial transactions, including the complexity of the tax situation. To complicate matters more, a new Congress is preparing to legislate tax policy changes that could affect everything from deal valuations to sale timing. Such changes also would influence how business owners approach exit strategies.
To ensure a successful exit, business leaders must pay close attention to how these potential tax reforms may affect their sales. Some of the biggest changes include:
Long-term capital gains. When a business owner sells a small business, it typically triggers a long-term capital gain, meaning that the sale is subject to applicable taxes. In 2025, the capital gains tax rates will remain at 0%, 15%, and 20%, but income thresholds have shifted. This can significantly impact the after-tax value of a business sale—particularly for small-business owners in the top tax brackets.
Corporate tax rates. Several major tax policies in the Tax Cuts and Jobs Act will expire at the end of 2025. The most significant of these policies for small business owners is the limitation of business deductions, such as loan interest. The effect for businesses during a merger or acquisition would be a decrease in valuations due to the change in a company’s profitability.
Estate and gift taxes. Without congressional action, the estate tax exemption is expected to sunset at the end of 2025, which would cause the lifetime exemption to decrease by more than half. If a business owner is planning generational transfers, this change in tax policy could shake up the timeline on which that transfer should occur.
To best weather the changes that these tax policies would entail, business leaders must take a proactive approach to exit strategy and planning. Staying ahead of the changes puts business leaders in a better position to approach their deal.
One of the first steps for a successful exit is understanding the company’s valuation. As soon as a merger or acquisition becomes a thought, the business leader should consult a valuation expert for an objective assessment of the business’s worth. This allows business owners to approach the transaction with reasonable expectations and be ready to negotiate.
Business leaders should prepare for a range of exit scenarios based on potential tax changes that could take place in the first year of the new administration. They should prepare a flexible timeline in case of capital gains tax increases or prepare for changes to corporate tax regulations that could affect the attractiveness of a sale. This would allow room for more informed decisions in the face of changing market conditions.
The transition between two administrations can also be a volatile time economically, so business leaders—especially those in the middle of a merger or acquisition—must be prepared for any scenario.
Potential buyers will scrutinize a business’s financials, so leaders should focus on improving key metrics by improving profit margins, reducing unnecessary expenses, and demonstrating recurring revenue streams. This makes the company more attractive to buyers and helps the business be more prepared for challenging economic conditions.
Even in the most challenging economic conditions, deals do happen. During the economic crisis of 2008–2009, some businesses were still successfully sold despite steep valuation declines, thanks to strategic timing or creative deal structures. Such deals included Bank of America Corp. acquiring Countrywide Financial Corp. for $4 billion and JPMorgan Chase & Co. acquiring Washington Mutual Inc. from the Federal Deposit Insurance Corp. for $1.9 billion.
On the other end of the spectrum, when the TCJA was passed in 2017, many businesses attempted to lock in favorable deals before further policy changes were enacted, including the $27 billion acquisition of Refinitiv by the London Stock Exchange Group Plc and the nearly $16 billion acquisition for Tiffany & Co. by LVMH Moët Hennessy Louis Vuitton SE.
Business leaders looking toward a merger or acquisition must stay agile in the dynamic environment that will be the US and global economy. Any speculation of what might happen is just that: speculation. But that doesn’t mean it’s OK to approach these conditions without a solid plan.
Business leaders must stay abreast of any legislative changes that could affect their businesses and deals, and build a strong team of financial advisers, tax specialists, and attorneys who can help them navigate complex scenarios. Flexibility requires business leaders to be ready to adjust their deal structure or timeline to the requirements of the circumstances.
The most important decision to ensure a successful exit in 2025 and beyond is for business leaders to keep their eyes on the prize. Tax considerations are important, but one must not forget the fundamental value of their business. Operations must remain strong, or deals fall apart.
Selling a business is never easy, particularly in circumstances that are as in flux as the US economy post-election. With careful planning and the right strategy, business leaders can come out of a deal successfully—whether despite or because of potential tax reforms in the coming years.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Justin DePardo is senior director of corporate development at Embarc Advisors.
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